Taking Words Into Account

COLLEGE OF BUSINESS ADMINISTRATION

Accounting isn’t always about numbers. Dr. Xuan Huang is taking a different tack with her research.

One of her projects uses textual analysis, a computer program that scans annual reports, 10Ks, conference-call transcripts and other texts to identify key words.

Huang uses these keywords and other textual and quantitative cues to better understand the psychology behind market fluctuations and often incorporates these findings into her coursework.

The impact of words can be significant. If they are positive, such as advanced, creative, efficient and excited versus negative ones, such as absent, annoy, argue or avoid.

Her research has shown that an abnormal positive tone predicts negative future earnings and cash flow, though it can temporarily help the stock price in the short run. “If they’re reporting bad earnings, they may take a more positive tone,”said Huang. “They want to explain why it’s not going well.”

This work feeds into her research in behavioral finance, known as Limited Attention Theory. This research investigates the sharp stock spikes associated with earnings announcements, followed by gradual increases or decreases over time.

“This approach enables me to expose students to current developments in accounting,” Huang said. “My recent research on textual analysis of financial reports brings up-to-date information to students on financial reporting, such as annual reports and earnings press releases.”